Any compensation method that affiliates pay to the quality or quantity of work the individual produces is refer to as pay for performance.
A portion of employee’s pay is put on risk in variable pay plans that are pay for performance plans in return for opportunity to earn additional pay.
Many or all employees are engaged in a common effort to accomplish productivity objectives in gain sharing plans that are group incentive plans. Performance can be measured on personal performance and corporate performance.
Types of Pay-for Performance Plans
When there are multiple layers of pay-for-performance system, it can improve corporation and simultaneously enhance the motivation of individual employees. For example, cooperation is promoted when bonuses are provided to work units or teams.
See Also: Methods of Performance Appraisal
However, bonuses provided to individual workers are more motivating because they permit workers to view how their personal contributions lead to direct rewards.
Since there are positive and negative features associated with all pay-for-performance systems, better results are produced by giving various kinds of incentives for various kinds of work situations than relying on single kind of pay incentive.
The benefits of each incentive plan can be realized by the organization by minimizing its negative side effects, with a multiple-layers-of-reward system.
Kinds of pay-for-performance plans differ in design. Some are designed to reward the entire organization, business units, teams, individuals or any combination of these.
- Individual Based Plans
The most widely used pay-for-plans in the industry are the individual plans. There are many plans that can be employed like bonus programs, merit pay and awards.
Benefits of individual-based pay-for-performance plans contains financial incentives can shape an individual objectives, rewarded performance can likely to be repeated, they fit in with an individualistic culture and they assist organization achieve individual equity.
Disadvantages contain single mindedness is being promoted. Employees may work against accomplishing quality objectives, they do not believe that pay or performance is associated and inflexibility is promoted by them.
- Team Based Plans
Team-based plans attempt to assist other struggle to enhance the flexibility of work force inside the organization. On the basis of group outcomes, these plans generally reward all team members equally.
The benefits of team-based pay-for-performance plans contain they facilitate performance measurement and they foster group cohesiveness.
Disadvantages contain the free-riding effect, possible lack of fit with individualistic cultural values, social pressure to limit performance, intergroup competition leading to a decline in overall performance and difficulties in identifying meaningful groups.
- Plant wide Plans
On the basis of performance of entire plant or unit, these plans reward all employees in a business unit or plant. Because plant wide plans return a portion of business organization’s cost savings to the workers, generally in the shape of a lump-sum bonus, these plans are generally referred to as gain sharing programs.
There are three main kinds of gain sharing programs which are Rucker Plan, Scanlon Plan and the Impro-share.
Advantages contain increasing the level of cooperation, eliciting active employee input, improving quality and fewer measurement difficulties.
Disadvantages contain problems with the criteria used to trigger rewards, protection of low performers and management-labor conflict.
- Corporate Wide Plans
It is based on the overall corporation’s performance and is most macro kind of incentive program. Profit sharing is most widely used kind of this program which differs from gain sharing in many important manners.
Another kind of corporate wide plan is employee stock ownership plans. Advantages of corporate wide plans include increased employee commitment, financial flexibility for the organization and tax advantages.
Disadvantages include limited effect on productivity, risk for employees and long-run financial difficulties.
Challenges for Pay-for-Performance System
It includes the following.
1 – The “Do only what you paid For” Syndrome: The more workers tend to concentrate on those indicators & neglect other significant job components, the closer pay is tied to particular performance indicators.
2 – Negative Effects on the Spirit of Cooperation: Information may be withheld by the employees from a colleague if they consider that it will assist the other person gain.
3 – Lack of Control: All the factors influencing the performance of employees mostly cannot be control by the employees.
4 – Difficulties in Measuring Performance: Measuring performance of workers is one of difficult tasks which a manager confronts especially when the measurements are used to distribute rewards.
5 – Psychological Contracts: A pay-for-performance system makes a psychological contract between the business organization and the employee, once implemented, and it is very resistant to alteration.
6 – The Credibility Gap: Workers mostly do not consider that pay-for-performance programs are fair or they surely reward performance.
7 – Job Dissatisfaction & Stress: Productivity is enhanced but job satisfaction is decreased in the pay-for-performance systems.
Meeting the Challenges of Pay for Performance Systems
Unless complementary HRM programs are implemented at the same time, the pay for performance programs is not likely to accomplish the required consequences.
1 – Link Pay and Performance Appropriately: There are few situations in which managers can justify paying employees according to pre-developed measure or formula.
2 – Use Pay for Performance as Part of Broader HRM System: Unless complementary HRM programs accompany them, pay-for-performance programs are not probably to accomplish desired consequences.
3 – Build Employee Trust: If the organization has cutthroat culture or if the managers have a poor history of labor relation then even the best conceived pay-for-plan can fail.
4 – Promote the Belief That Performance Makes a Difference: Unless a business organization makes an ambience in which difference is made by performance, it may finish in a decreased-achievement organizational culture.
5 – Use Multiple Layers of Rewards: Providing various kinds of pay incentives for various work situations is likely to generate better results than relying on single kind of pay incentive because all pay-for-performance systems have negative & positive features.
6 – Increase Employee Involvement: When compensation program is not considered by the workers as legitimate, they will generally do whatever they can do to overthrow the system.
7 – Use Motivation and Non-Financial Incentives: Some persons are more interested in non-financial areas of their work.
Designing Pay-for Performance Plans for Executives and Salespeople
Sales personnel and executives are handled separately than other kinds of employees in pay-for-performance plans.
See Also: Job Performance Determinants
There are many plans that associate the pay of executives to the performance of organization, but there is minute agreement which is better.
Sales professionals may be paid in the shape of straight commission, straight salary or a combination plan.
Reasons for Pay for Performance Failures
Following are the reasons for the failure of individual-based pay-for-performance systems.
- Rating errors are rampant regardless of the appraisal form used.
- Dysfunctional conflict in the organization may be leaded because merit systems emphasize individuals rather than group objectives.
- Short term orientation is encouraged at the expense of long term objectives by the use of specified time period for performance evaluation.
- Employee and supervisor sometime agree on the evaluation which leads to interpersonal confrontation.
- For the service sector, individual merit pay systems are not proper.
- A rather limited amount of compensation is typically controlled by supervisors, so merit pay differentials are generally quite little and therefore of questionable value.
